PUBLIC ECONOMICS AND FINANCE:
THE ECONOMICS OF TAXATION
CEU, Economics Department, 2006
Course: 2 credits
The course analyzes the effect of taxation
on the economy: partial and general equilibrium tax incidence, optimal
commodity, corrective and income taxation, taxes and labor supply, taxation and savings, taxation and firm behavior,
and a comparison of theoretical versus actual tax codes. Its approach mixes theories (like optimal income tax schemes)
and empirical assessments (like estimates of the elasticity of reported taxable income to marginal tax rates); and there
is emphasis both on normative (like optimal policies) and positive (like revenue implications of tax changes) aspects
of public economics. It draws heavily on formal models and methods, particularly from microeconomics and econometrics.
Core and additional textbooks:
A. Atkinson and J. Stiglitz, Lectures in Public Economics (New York, McGraw Hill, 1980)
G. Myles, Public Economics (New York: Cambridge University Press, 1995)
J. Laffont, Fundamentals of Public Economics (Cambridge: MIT Press, 1988)
A. Auerbach and M. Feldstein, Handbook
of Public Economics, Volumes 1,2, 3 and 4 (Amsterdam:
North Holland, 1985, 1987 and 2002)
B. Salanié: The Economics of Taxation (London, MIT Press, 2003)
I. The incidence of taxation (2.5 lectures)
· GE Incidence
· Application: International Capital Flows
· Asset Prices and Tax Incidence
· Application: Taxation and Housing Markets
· The fundamental tax reform debate: income vs consumption taxes
· General Budget of the European Union for the Financial Year 2006, The figures, European Commission.
· Atkinson-Stiglitz chapter 6
· M. Feldstein and C. Horioka: Domestic Savings and International Capital Flows, Economic Journal 90 (1980), 314-329.
· D. Cutler: Tax Reform and the Stock Market: An Asset Price Approach, American Economic Review 78 (1988),
· L. Summers: The Asset Price Approach to the Analysis of Capital Income Taxation, Proceedings of the National
Tax Association (1983), 112-120.
· J. Poterba: Tax Subsidies to Owner-Occupied Housing: An Asset Market Approach, Quarterly Journal of
Economics 99 (1984), 729-752.
· A. Auerbach and L. Kotlikoff: Dynamic Fiscal Policy (Cambridge: Cambridge University Press, 1987)
II. Commodity taxation (2 lectures)
· Background: measuring efficiency costs
· The Theory of Optimal Commodity Taxation
· Application: Taxation in Developing Countries
· Application: Dynamic Optimal Taxation
· J. Hausman: Exact Consumer Surplus and Deadweight Loss, American Economic Review 81 (1981), 622-676.
· Atkinson-Stiglitz chapter 12
· Myles chapter 4
· V. V. Chari and P. Kehoe: Optimal Fiscal and Monetary Policy, in J. Taylor and M. Woodford, eds.,
Handbook of Macroeconomics (Amsterdam, Elsevier, 1999), Section 1.
· E. Ahmand and N. Stern: The Theory of Reform and Indian Indirect Taxes, Journal of Public Economics 25
· R. Barro: On the Determination of the Public Debt, Journal of Political Economy 87 (1979), 940-971.
· D. Niepelt: Tax Smoothing versus Tax Shifting, Review of Economic Dynamics 7 (2004), pp. 27-51.
· C. Hevia and J. P. Nicolini: Optimal Devaluations, University of Chicago, mimeo (2003)
(Available at http://repec.org/esLATM04/up.11051.1084582208.pdf)
· M. Golosov, A. Tsyvinski and I. Werning: New Dynamic Public Finance: A Userís Guide, NBER Macroeconomics
Annual, 2007 (forthcoming).
III. Corrective Taxation (1 lecture)
· Background: The Theory of Externalities
· "Green Taxes"
· Alternatives: Regulation
· Valuing environmental benefits
· Laffont chapter 1
· Myles chapter 10
· P. Diamond: Consumption Externalities and Imperfect Corrective Pricing, Bell Journal of Economics 4 (1973),
· M. Weitzman: Prices vs. Quantities, Review of Economic Studies 41 (1974)
· P. Diamond and J. Hausman: Contingent Valuation: Is Some Number Better than No Number?, Journal of
Economic Perspectives 8 (Fall 1994), 45-64.
IV. Taxation of Labor Income (3 lectures)
· The theory of labor income taxation
· Empirical evidence on taxation and labor supply
· Tax reforms and labor supply
· Myles chapter 5, 7
· Atkinson-Stiglitz chapter 13
· P. Diamond: Optimal Income Taxation: An Example with a U-Shaped Pattern of Optimal Marginal Tax Rates,
American Economic Review 88 (1998), 83-95.
· G. Akerlof: The Economics of Tagging as Applied to the Optimal Income Tax, American Economic
Review 68 (1978), 8-19.
· J. Stiglitz: Pareto Efficient and Optimal Taxation and the New Welfare Economics, in Handbook Volume 2.
· J. Hausman: Taxes and Labor Supply, in Handbook Volume 1.
· R. Blundell and T. MaCurdy: Labor Supply: A Review of Alternative Approaches, in A. Ashenfelter and
D. Card, eds., Handbook of Labor Economics, Volume 3 (Amsterdam, Elsevier, 1999), 1569-1695.
· T. Macurdy: Work Disincentive Effects of Taxes: A Reexamination of Some Evidence, American Economic
Review 80 (1992), 243-249.
· T. Mroz: The Sensitivity of an Empirical Model of Married Women's Hours of Work to Economic and
Statistical Assumptions, Econometrica 55 (1987), 765-800.
· N. Eissa: Taxation and Labor Supply of Married Women: The Tax Reform Act of 1986 as a Natural
Experiment, NBER Working Paper 5023, 1995.
· N. Eissa and J. Liebman: Labor Supply Response to the Earned Income Tax Credit, Quarterly Journal of
Economics, 111 (1996), 605-637.
· A. Goolsbee: What Happens When You Tax the Rich? Evidence from Executive Compensation, American
Economic Review 108 (2000), 352-378.
· A. Bovenberg, J. Graafland and R. de Mooij: Tax Reform and the Dutch Labour Market: An Applied General
Equilibrium Approach", Journal of Public Economics 78 (2000), 193-214.
· M. Feldstein: The Effects of Marginal Tax Rates on Taxable Income: A Panel Study of the 1986 Tax Reform,
Journal of Political Economy 103 (1995), 551-571.
· M. Feldstein and D. Feenberg: The Effect of Increased Tax Rates on Taxable Income and Economic Efficiency:
A Preliminary Analysis of the 1993 Tax Rate Increases. NBER Working Paper 5370, published in Tax Policy
and the Economy, Volume 10, edited by James Poterba MIT Press, 1996, pp. 89-118.
· G. Auten and R. Carroll: The effect of income taxes on household income. Review of Economics and
Statistics 81 (1999), pp. 681-693.
· J. Gruber and E. Saez: The Elasticity of Taxable Income: Evidence and Implications, Journal of Public
Economics 84 (2002), 1-32.
· M. Mercader-Prats: On the Distributive and Incentive Effects of the Spanish Income Tax: A Comparison of
1980 and 1994, European Economic Review 41 (1997), 609-617.
V. Taxation and Savings (1.5 lectures)
· Background: capital income, wealth and saving behavior
· The optimal taxation of capital
· Tax policy, rates of return and saving
· Application: targeted tax subsidies to saving
· Atkinson-Stiglitz chapters 3,4
· Myles chapter 7
· D. Bernheim: Taxation and Saving, in Handbook volume 3.
· V. V. Chari and P. Kehoe: Optimal Fiscal and Monetary Policy, in J. Taylor and M. Woodford, eds., Handbook
of Macroeconomics (Amsterdam, Elsevier, 1999), Section 2.
· M. Feldstein: The Welfare Cost of Capital Income Taxation, Journal of Political Economy 86 (1978), S29-52.
· R. Lucas: Supply-Side Economics. An Analytical Review, Oxford Economic Papers 42 (1990), 293-316.
· R. Hall: Intertemporal Substitution in Consumption, Journal of Political Economy 96 (1988), 339-357.
· L. Summers: Capital Taxation and Accumulation in a Life Cycle Model, American Economic Review 71
· E. Engen, W. Gale and J. Scholz: Do Saving Incentives Work? Brookings Papers on Economic Activity,
· J. Poterba, S. Venti and D. Wise: How Retirement Saving Programs Increase Saving, Journal of Economic
Perspectives 10 (1996).
VI. Taxation and Firm Behavior (1.5 lectures)
· Taxation of corporate capital: investment incentives
· The role of financial policy
· Taxation of capital gains
· R. Caballero: Aggregate Investment, in Handbook of Macroeconomics (Amsterdam, Elsevier, 1999), chapter 12.
· K. Hasset and R. G. Hubbard: Tax Policy and Business Investment, in Handbook volume 3.
· Atkinson-Stiglitz chapters 4,5
· Myles chapter 8
· A. Auerbach: The Tax Reform Act of 1986 and the Cost of Capital, Journal of Economic Perspectives 1 (1987), 73-86.
· M. Devereux and M. Pearson: European Tax Harmonization and Production Efficiency, European Economic
Review 39 (1995), 1657-1681.
· J. Cummins, K. Hassett and R. G. Hubbard: A Reconsideration of Investment Behavior Using Tax .Reforms
as Natural Experiments, Brookings Papers on Economic Activity 1987:2, 141-195.
· A. Auerbach: Taxation and Corporate Financial Policy, in handbook volume 3.
· R. Gordon and B. Malkiel: Corporation Finance, in H. Aaron and J. Pechman, eds., How Taxes Affect
Economic Behavior, Brookings, 1981, 131-198.
· M. Miller: Debt and Taxes, Journal of Finance 32 (1977), 261-275.
· A. Auerbach: Capital Gains Taxation in the United States: Realizations, Revenue, and Rhetoric, Brookings
Papers on Economic Activity, 1988:2, 595-631
· L. Burman and W. Randolph: Measuring Permanent Responses to Capital Gains Tax Changes in Panel Data,
American Economic Review 84 (1994), 794-809.
VII. Public Economics: Theory and Policy (0.5 lecture)
· Sources of Disagreement in Policy Analysis
· Political Economy
· Design of Tax Systems
· Atkinson-Stiglitz chapters 10, 18
· A. Harberger: The Other Side of Tax Reform, in Dornbusch, ed.,: Policymaking in the Open Economy, 1993.
Grading will be based on problem set assignments
(10-15%) and a final exam (85-90%).